A Is a US-Based MNC with AAA Credit; B Is an Italian Firm

question 83

Multiple Choice

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00,a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR: The firm's external borrowing opportunities are: $$\begin{array} { c | c c } & € \text { borrowing } & \text { \$ borrowing } \\\hline \mathrm { A } & € 7 \% & \$ 8 \% \\\mathrm {~B} & € 6 \% & \$ 9 \%\end{array}$$

• A)Firm A does 2 swaps with the swap bank, $ at bid and € at ask.Firm B does 2 swaps with the swap bank, $ at ask and € at bid.Firms A and B would each save 90bp and the swap bank would earn 20bp.
• B)There is no mutually beneficial swap at these prices.
• C)Firm A does 2 swaps with the swap bank, $ at ask and € at bid.Firm B does 2 swaps with the swap bank, $ at bid and € at ask.Firms A and B would each save 90bp and the swap bank would earn 20bp.
• D)None of the above

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Definitions:

Monocot

A group of flowering plants whose seeds typically contain one embryonic leaf, known for having parallel leaf veins and various other structural differences from dicots.

Predominant

Being the most common or frequent; having superiority or ascendancy over others in strength, influence, or importance.

Photosynthetic Product

The output of photosynthesis, primarily glucose (a sugar), which serves as a primary energy source for plants and other photosynthetic organisms.

Phloem

The vascular tissue in plants responsible for the transport of sugars and other metabolic products downwards from the leaves.